Correlation Between Air China and Metro Investment

Can any of the company-specific risk be diversified away by investing in both Air China and Metro Investment at the same time? Although using a correlation coefficient on its own may not help to predict future stock returns, this module helps to understand the diversifiable risk of combining Air China and Metro Investment into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Air China Ltd and Metro Investment Development, you can compare the effects of market volatilities on Air China and Metro Investment and check how they will diversify away market risk if combined in the same portfolio for a given time horizon. You can also utilize pair trading strategies of matching a long position in Air China with a short position of Metro Investment. Check out your portfolio center. Please also check ongoing floating volatility patterns of Air China and Metro Investment.

Diversification Opportunities for Air China and Metro Investment

0.6

Correlation Coefficient

Air China  Metro Investment

Poor diversification

The 3 months correlation between Air and Metro is 0.6. Overlapping area represents the amount of risk that can be diversified away by holding Air China Ltd and Metro Investment Development in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Metro Investment Dev and Air China is a relative statistical measure of the degree to which these equity instruments tend to move together. The correlation coefficient measures the extent to which returns on Air China Ltd are associated (or correlated) with Metro Investment. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Metro Investment Dev has no effect on the direction of Air China i.e., Air China and Metro Investment go up and down completely randomly.

Pair Corralation between Air China and Metro Investment

Assuming the 90 days trading horizon Air China Ltd is expected to generate 0.73 times more return on investment than Metro Investment. However, Air China Ltd is 1.37 times less risky than Metro Investment. It trades about 0.16 of its potential returns per unit of risk. Metro Investment Development is currently generating about -0.01 per unit of risk. If you would invest  654.00  in Air China Ltd on September 25, 2024 and sell it today you would earn a total of  159.00  from holding Air China Ltd or generate 24.31% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	100.0%
Values	Daily Returns

Air China Ltd  vs.  Metro Investment Development

Air China

Risk-Adjusted Performance

12 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Air China Ltd are ranked lower than 12 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Air China sustained solid returns over the last few months and may actually be approaching a breakup point.

Metro Investment Dev

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Metro Investment Development has generated negative risk-adjusted returns adding no value to investors with long positions. Despite somewhat strong basic indicators, Metro Investment is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Air China and Metro Investment

The main advantage of trading using opposite Air China and Metro Investment positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Air China position performs unexpectedly, Metro Investment can make up some of the losses. Pair trading also minimizes risk from directional movements in the market. For example, if an entire industry or sector drops because of unexpected headlines, the short position in Metro Investment will offset losses from the drop in Metro Investment's long position.

The idea behind Air China Ltd and Metro Investment Development pairs trading is to make the combined position market-neutral, meaning the overall market's direction will not affect its win or loss (or potential downside or upside). This can be achieved by designing a pairs trade with two highly correlated stocks or equities that operate in a similar space or sector, making it possible to obtain profits through simple and relatively low-risk investment.

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Note that this page's information should be used as a complementary analysis to find the right mix of equity instruments to add to your existing portfolios or create a brand new portfolio. You can also try the Global Correlations module to find global opportunities by holding instruments from different markets.